8tracks plans Regulation A crowdfunded equity offering

Music service 8tracks is filing for a Regulation A securities offering, hoping to raise $5-million or more through a public investment opportunity open to anybody. Required documents will be filed this week. After regulatory review, 8tracks expects the investment round to open by June.

Regulation A operates similarly to traditional equity investing or an Initial Public Offering (IPO). The difference is that investors needn’t be qualified by income or registered as professional investors. It is SEC-regulated crowdfunding, in which participants buy slivers of company ownership for small minimum amounts that might be as low as $100.

Expectations

The decision to raise funds via Regulation A follows a test of community interest conducted on SeedInvest, in which individuals could submit their interest in investing, with a dollar amount. As of this post, SeedInvest (which is still running the test) indicates interest totaling just over $30-million from about 30,000 people.

David Porter marveled over that number, but he doesn’t expect interest to transfer totally to investment. “It’s different when it’s time to pull out the credit card,” he said. “We’d be happy to raise $5-million.” In company history, 8tracks has raised a total of $3-million.

All the same, David Porter is looking at the possibility of doubling that influx to $10-million. How would the money be used?

Growth and Profitability

“The two overarching goals are audience growth and profitability,” Porter said. “The big area for audience growth is about building out the music library. Two-thirds of our audience are Millennials. A lot of people in that demo don’t download music; they stream it. For playlist creation to happen easily, we need a library for them to draw from.” Porter noted that having a deep library will also enable the platform to offer playlist creation on mobile devices — again, important to 8tracks’ youthful demo.

Presentation and curation are also on the product roadmap. “One of the most important things is getting ever better at presenting playlists relevant to the particular listener’s taste and context. That will be driven by data science and personalization.”

Overall, David Porter wants to return the company to profitability, a status enjoyed by 8tracks as recently as 2013. That was the last year the company qualified for special music royalty rates under the Webcaster Settlement Act, in which it qualified as a “small webcaster.” Royalty expense has increased for 8tracks since then, and in 2016 the Webcaster Settlement Act is no longer in effect at all — 8tracks is paying the same rate (17 cents per 100 song streams per user) as Pandora.

“Our goal is to return to long-term profitability and growth — especially marginal profitability, where every hour we stream, we make money,” Porter told us.

What’s In It For Investors?

How can investors make money in the Regulation A offering? Unlike retail investing in the stock market, there is no mechanism for rise and fall of share value, or trading shares with other investors. Unlike a perpetually open market, Regulation A fundraising works more like venture capital. In that context, one exit path would be an acquisition of 8tracks by a larger company — a “cash event” in which the windfall would be distributed to all owners. Setting up for that, 8tracks will establish a company value within which Regulation A equity can be bought.

“The most likely way is no different from any other company that would raise venture capital of this size. It’s not unrealistic to imagine that there could be an acquisition, or even going public,” David Porter said.